Allan Gray: Foreign investors appear to be recovering their risk appetite

For most of the 15 years since South Africa's first democratic elections in 1994, foreigners have been net investors into JSE-listed companies. The cumulative net portfolio flows from foreigners now equate to over R900bn when measured in today's prices. This is equivalent to a quarter of today's free float market capitalisation of the JSE (and close to 40% of the 'shareholder-weighted' free float, which adjusts for the dual-listed companies).

It should be no surprise then that foreign investors exert a significant influence over the South African equity market, and that our market demonstrates a very strong correlation with other emerging equity markets. After many consecutive years of net inflows, the foreigners lost their nerve in the second half of 2008. In their 'flight to safety' they became net sellers of South African shares, and this surely contributed to the sharp sell-off in our equity market and in the rand.

The FTSE/JSE All Share Index has now doubled in US dollar terms from its low in October last year, and foreign investors have rediscovered their risk appetite. Very strong net inflows from foreigners have been registered over the last few months.

Investors in the Allan Gray Equity Fund should be aware that the South African equity market is vulnerable to any reversal in the currently bullish sentiments of foreign investors.

Furthermore, the South African equity market and many other emerging equity markets are close to their record highs relative to developed markets.

From a longer-term perspective, the significant foreign ownership of major South African enterprises will strain the country's balance of payments as dividends are remitted overseas.